What happened to those "king-level" Layer 2 projects based on Bitcoin?
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
Crypto Valley Live (ID: cryptovalley)
In 2018 and 2019, activity around L2 development was very healthy. On the BTC side, the Lightning Network (LN) went live on the mainnet in March 2018. In terms of Ethereum, multiple L2 variants including SpankChain, Plasma/Plasma Cash (such as Loom Network) have also been launched one after another. However, as the 2018-2019 bear market dragged on, we saw a marked decline in on-chain activity, as the speculative activity on these networks subsided, when demand for scaling solutions waned. But then as market conditions started to improve in Q3 and Q4 2019, we saw an uptick in interest in L2 solutions (both the anticipation that a new bull market would lead to transaction congestion, and the expectations for base-layer protocols) The need for additional features (such as privacy, etc.).
Lightning Network
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Lightning Network
LN is by far the most important, most discussed, and most vocal off-chain scalability project. Since the release of the LN document in 2015, the project has been the subject of intense discussion and debate. Since its launch, LN has achieved impressive growth in the number of channels, network capacity, usage, etc. However, entrepreneurs and investors are still figuring out which business opportunities in the LN ecosystem make the most sense. The directions they are discussing include: establishing a liquidity center to collect routing fees, providing integrations and user services on the LN, using the LN to provide payment rails, and finally discussing investing in LN infrastructure.
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Liquidity supply of LN
Since the goal of LN is to create a payment network, especially for micropayments, it is not difficult to establish a business model to do this: just provide a few nodes with hundreds of channels, and provide routing payment channels to earn fees . In fact, the original idea of setting up LN is (1) the income from this service is sufficient to cover operating costs (2) to generate risk-free profits.
In theory, running a node on LN and charging routing fees should be part of a profitable business (similar to running a BTC full node), which is also the aspect that the LNBIG team, LN's largest liquidity provider, relies on for survival. LNBIG currently operates 25 public nodes, roughly controlling about 50% of the entire LN capacity.
According to the anonymous founder of LNBIG in an interview with The Block, LNBIG may lose money on this investment now, but they are looking at the long-term adoption of the LN network.
For those who need more rigorous data on liquidity in LN, BitMEX Research released a thorough analysis report on LN fees in March 2019 (they conducted an in-depth analysis based on their own experience using LN). One of the core points in the report is: in the most optimistic case, LN’s channel expense ratio (or regarded as annualized rate of return) is only ~1%, and this rate of return does not include the on-chain fees required to open the channel .
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LN user service
The second type of investment (and possibly the richest) in the LN ecosystem is investment in user services. This is a broad category that includes all services that interact directly with consumers. We can subdivide this field into three categories:
Micropayments supported by LN"Financial Services on LN"Services to improve UX and integration with LN
The first type of service to emerge organically on LN was
micropayment service
, This is probably the whole argument that LN was attractive to users at that time. Publishing platform Y'alls and mobile minutes service Bitrefill were the first services to appear on LN.
With the development of LN, the tools for convenient access to LN have also begun to increase, including wallets that support LN such as Zap, Eclair, and BLW. Bitrefill has also started to provide services, opening channels for users, such as Thor channels, etc. This has gradually matured the LN ecosystem, leading to the emergence of financial-centric LN user services, such as merchant services (merchant services)/BTC cashback service (Fold), and LN-based BTC landing (River Financial and the currently defunct Sparkswap) LN-integrated exchanges (Bitfinex, LN Marketplace).
More companies are being built in LN user services than in either of the other two verticals. According to statistics, more investment opportunities mean that these projects are more likely to obtain financing.
Winners in this vertical are likely to gain some market share in markets other than digital currencies as well.
For example, Fold focuses on providing BTC-based cashback services, which go beyond the general crypto community and target more mainstream people. LN is used here as a better user experience tool to deliver BTC rewards. This market direction allowed Fold to raise $2.5 million in September last year. Similarly, Bitrefill successfully completed $2 million in VC financing, focusing on using LN to expand BTC merchant services. Despite the general excitement about LN-based user services, that's not to say the field is free of challenges. Some companies, such as Sparkswap, have successfully raised VC funding, but then they realized that their business may be too far ahead, and we know that for startups in this space, too far ahead is tantamount to failure.
Financial Rails using LN (Financial Rails)
Although this is a relatively new direction in the LN ecosystem, it is likely to become a big trend in the near future. The purpose of the financial channel is to use the characteristics of LN, such as global coverage, instant settlement, low fees, etc., to attract target groups outside the crypto field. In other words, although these businesses use LN as a payment channel on the back end, users do not know that they are using BTC or LN. We can draw an analogy to Cash App or Venmo, which use protocols like ACH and Swift under the hood to actually move users’ money.
Zap is one of the earliest players in this vertical. Zap plans to use LN to settle everyday dollar payments, such as merchant payments or personal cash transfers. The advantages of using LN as a settlement layer are instant settlement capabilities and low fees, which may replace traditional payment channels (as traditional payment systems charge up to 15% of the transaction size). For example, Zap's Strike product achieves this goal, and it does not require users or merchants to pay in BTC at all times. This also solves the main problems faced by adopting BTC payments (including price volatility and unfriendly tax laws surrounding Bitcoin payments, etc.).
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LN infrastructure
In the field of digital currency, financing digital currency infrastructure with venture capital, that is, buying equity in development agreement companies, is a highly controversial topic. However, the venture capital side knows exactly what the investee is doing. For LN, this means investing in the team that builds and advances the LN protocol. The top three startups working in this vertical are Lightning Labs, ACINQ, and Blockstream. Since key parts of the LN have already been built, these companies focus on improving the experience of users and developers using the LN. For example, Lightning Labs has developed tools such as Loop and Faraday to help node operators manage channels smoothly. Similarly, ACINQ is also developing an API tool similar to stripe, allowing enterprises to easily integrate with LN.
Early useful news on opportunities to invest in closed-source third parties integrating LN without being able to get ahead of the curve.
You cannot take advantage of your BTC position by supporting LN. After all, LN promises to increase the adoption of BTC payments by users and merchants.
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Liquid
BTC side chain
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RSK
Blockstream launched Liquid in late 2018 to address the confidentiality of BTC transactions. In 2019, Liquid grew slowly, with less than 100 BTC locked on the sidechain. However, since January, the sidechain has seen a continuous inflow of hundreds of BTC every month, and achieved a capacity of more than 1,600 BTC in mid-April (exceeding the capacity of LN).
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The ultimate vision of RSK is to replicate Ethereum on top of BTC. In order to achieve this goal, RSK implements a sidechain bidirectionally pegged to BTC, and uses a fork of Ethereum's smart contract to achieve programmability pegged to BTC assets, which is RSK's Smart Bitcoin (RBTC). Similar to Liquid, RSK uses a federation (Federation) to ensure two-way pegs. RSK federation members are not public and can only be identified by public keys. Similar to Liquid, this sidechain faces the problem of gaining mass adoption. Although RSK has been active since December 2018, it has only attracted around 160 BTC to the sidechain. During 2019 the network averaged only 50 BTC on the sidechain.
So far, RSK’s investment performance has not been satisfactory. According to Crunchbase, RSK Labs, the company behind the project, received $7 million in VC financing. This does not include the 22,000 BTC raised in a private token sale by RIF Labs (which merged with RSK Labs to create IOV Labs). To make matters worse, RSK is now competing with a growing number of projects looking to build interoperability between BTC and smart contract blockchains.
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Interoperable BTC sidechain
For a while, many digital currency investors believed that eventually every feature, such as privacy and programmability, would be built as a layer on top of BTC. For these reasons, Liquid and RSK sidechains may sound like good investments. More recently, this may have changed. For investors looking to add programmability to BTC, teams working on building bridges between BTC and Ethereum or other smart contract platforms have proven to be the better bet. Just look at TBTC's recent blessings. Just a few weeks ago, the Keep/TBTC team announced $7.7 million in funding to accelerate the project."TBTC is not alone. In fact, it is safe to say that every emerging smart contract platform is already thinking about how to build a BTC sidechain/bridge link to its own platform. In the Cosmos ecosystem, Nomic Bitcoin Sidechain is a project worth watching. The project utilizes the Tendermint technology stack to implement a BTC sidechain that will make Nomic BTC (NBTC) interoperable with other Tendermint assets when the Inter-Blockchain (IBC) protocol emerges. Likewise, Tezos fans started their own TzBTC project, where they started minting BTC tokens inside the Tezos blockchain."
All in all, in the past two years, there have been many experiments and constructions in the field of scalability under the BTC chain. Investments in the LN space, especially in LN infrastructure and user services, have been growing significantly and are likely to continue to grow in the next few years.
